UK governance code fails at BP and Prudential

(Republished on Oct. 19 with the following disclaimer: Neil Collins owned shares in BP when he wrote this article; he bought shares shortly before and after)

BP and Prudential are two of Britain’s biggest and most respected companies. Their lavish annual reports contain dozens of pages on how these great corporations are run. Both boast of their compliance with the code of corporate governance, which encourages proper boardroom debate to avoid bad decisions, boosts the chairman, and insists that he cannot also be the chief executive, lest one person become too powerful.

At BP, a powerful chairman in the shape of Peter Sutherland was replaced in January by Carl-Henric Svanberg, who had been chief executive of Ericsson. He has been the invisible man at BP.

In normal times, this might not matter. As the company’s oil pollutes the southern coastline of the United States, it’s a PR disaster. In a crisis, the chairman must be seen to be supporting his chief executive. Unfortunately, Svanberg’s chief executive, Tony Hayward, is not media-friendly either.

Hayward is only starting to show that he grasps the severity of the crisis facing BP. The board seems to be further behind. It should have decided to suspend dividend payments until the Macondo incident is closed, before external pressure to do so becomes irresistible.

The failure at Prudential is a different sort of corporate disaster. Chairman Harvey McGrath has indeed stood right beside Tijane Thiam, his chief executive, throughout the doomed attempt to buy AIA, the Asian insurer.

The Pru board is full of luminaries, some of whom may even understand life insurance company accounts. Yet they allowed an untried executive team to try to pay a high price for a business the Pru couldn’t afford.

There is no simple recipe for good corporate governance. In the US, where chairmen are usually also chief executives, the list of failures — Enron and Lehman Brothers, for example — is long.

The UK’s division of responsibility can constrain rampant chief executives, but an alliance of CEO with chairman can still leave the rest of the board powerless. And a strong personality in charge can make a big difference in a crisis. Unfortunately, the chief executives and chairmen who are men for all seasons do not yet exist.

We have a couple of fools running the Prudentia[, similar to the ex-boss of RBS. I have held a bond with the PRU for around 10 years and I seriously was thinking of cashing it in, if the AIA merger took place. Tkank goodness it failed. The debt problem would have been enormous for the company. I hope the PRU board gets turfed out for their imprudent behavior and are forced to pay the huge legal costs out of their own pockets. I hope my investment hasn’t been squandered in the process.

UK governance code fails at BP and Prudential
In what way has it failed?
Companies are in business for profit and not to be ‘nice blokes!’ and it seems reasonable that even when there may be some internal disagreement on which direction to take all work for the company benefit.
BP’s latest fiasco is in clear site and at a pristine location. However, the actual cost is not on the scale of AIG, etc.

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